Moody’s: Gradual reforms to support growth, banking risks remain

NEWDELHI: India’s growth outlook remained robust in the shortterm, backed by sustained gradual reforms, but mounting bad loans is a problem area, global credit agency Moody’s said in its latest report.

Moody’s has retained India’s sovereign rating at Baa3. A rating evaluates a borrower’s credit worthiness. A higher sovereign rating implies the government has lower likelihood of defaulting on repaying its lenders.

The government has pitched for a sovereign ratings upgrade given the string of reforms in the last few months. India has enacted a bankruptcy law to deal with insolvency and a nationwide GST is in the final stages of implementation.

Bad loans, however, continues to remain a challenge.

“As banks continue to recognise bad assets, non-performing loans will rise further, particularly for public sector banks,” Moody’s said in its annual credit analysis of India. “We estimate that the capital needs are notably larger than the ₹70,000 crore of equity over the next four years proposed by the government.”

That said, focus on bad asset recognition and the new bankruptcy law could enhance India’s sovereign credit profile, “if it led to improved bank capitalisation levels, renewed loan growth and robust risk processes.”

The Moody’s report has rated India’s credit profile in terms of economic strength as “high”, institutional strength as “moderate”, fiscal strength as “low” and susceptibility to event risk (like bad loans) as “moderate.”

It has forecast India’s real GDP to growth at around 7.5% in the next two years. “Over time, sustained fiscal consolidation, stable inflation at moderate levels and progress on reforms would contribute to sustained growth. However, we expect the benefits to be very gradual,” it said.